Introduction
Fiscal consolidation entails reducing budgetary deficits and stabilizing public debt to preserve macroeconomic stability. Recovering from a pandemic-induced peak deficit of 9.2% of GDP in FY21, the Government of India implemented a calibrated fiscal glide path, reducing the fiscal deficit to 4.8% of GDP in FY25 and 4.4% in FY26, alongside a medium-term target to lower the Central debt-to-GDP ratio to approximately 50% by FY31.
Key Fiscal Reforms Undertaken for Consolidation
To restore fiscal prudence without derailing economic recovery, the Union Government adopted multi-pronged structural and administrative reforms:
- Expenditure Restructuring: Public spending was tilted heavily toward growth-inducing capital investment, with capital outlay scaling to approximately ₹11.1 lakh crore (3.4% of GDP). Concurrently, revenue expenditures were rationalised through targeted direct benefit transfers (DBT) via the JAM trinity, curbing leakages in food and fertilizer subsidies.
- Enhanced Budgetary Transparency: The Centre discontinued off-budget borrowings—historically channeled through Extra-Budgetary Resources (EBRs) via agencies like the Food Corporation of India (FCI) and the National Highways Authority of India (NHAI)—bringing hidden liabilities onto the formal balance sheet.
- Revenue Mobilisation Measures: Tax administration was modernized using GST e-invoicing, faceless assessments, and data analytics to broaden compliance. These measures, alongside simplified personal income tax regimes and robust non-tax dividends from public sector enterprises and the Reserve Bank of India, buoyed sovereign receipts.
- Sub-National Fiscal Discipline: The Centre strictly enforced borrowing ceilings under Article 293(3) of the Constitution and linked additional borrowing space of 0.5% of GSDP to tangible state-level power distribution reforms and capital spending milestones.
Effectiveness in Promoting Fiscal Discipline
These structural interventions have delivered measurable improvements in fiscal governance and allocative efficiency:
- Credible Glide Path Adherence: The Central Government consistently met its post-pandemic deficit targets without resorting to disruptive, pro-cyclical cuts in productive expenditure.
- Improvement in Expenditure Quality: The revenue deficit compressed to 1.5% of GDP in FY26, ensuring that a rising share of borrowed capital is deployed into long-term infrastructure assets rather than operational consumption.
- Curtailment of Hidden Contingent Liabilities: Greater accounting transparency has rebuilt market confidence and enhanced sovereign credit credibility by reporting the actual fiscal stance truthfully.
Persistent Long-Term Fiscal Sustainability Challenges
Despite notable consolidation achievements, substantial structural vulnerabilities remain:
- General Government Debt Overhang: Consolidated general government debt remains elevated around 82% of GDP, substantially above the 60% ceiling (40% Centre + 20% States) recommended by the N.K. Singh FRBM Review Committee.
- Rigid Interest Service Burdens: Committed interest payments consume nearly 25% of total budgetary spending and 37% of revenue receipts, severely crowding out capital outlays for human development in health and education.
- Low Tax-to-GDP Ratio: The gross tax-to-GDP ratio remains range-bound around 11.5%, pointing to a narrow direct tax base and an enduring informal economy.
- Sub-National Fiscal Slippages: Several state governments face fiscal strain due to unbudgeted freebies, recurring DISCOM financial losses, and moves to revert to the unfunded Old Pension Scheme (OPS), posing risks to the consolidated fiscal matrix.
Conclusion
Achieving durable fiscal sustainability requires complementing deficit reduction with institutional depth. Establishing an independent Fiscal Council to offer unbiased macroeconomic forecasts, broadening the direct tax base, and ensuring that nominal GDP growth consistently outpaces sovereign borrowing costs will anchor India's long-term debt trajectory.